Thursday, April 24, 2014

Editor's note: Below is a Q&A with Mac Robertson, an independent portfolio manager and macro strategist who recently Tweeted a critique of Thomas Piketty's new book, "Capitalism in the 21st Century." This Q&A went out to subscribers of our "10 Things You Need To Know Before The Opening Bell" newsletter on Monday morning. Sign up here to get the newsletter and more of these interviews in your inbox every day.

BUSINESS INSIDER: Your main point of criticism was Piketty's data set. What was wrong with it?

MR: National account income data is, by definition, made up of many subaccounts which have various weights waxing and waning. So as particular weights suddenly surge while others decline, the aggregate summation is not reflective of these dynamics. This is especially problematic with household income, both annual income or accumulating net worth. In particular income is a "fat tail" with extreme skew — a Pareto distribution — or is actually a bimodal or multi modal distribution.
This means policy acting upon one part of the distribution will often have little impact on another part. Policy changes for, say, the top decile will have no impact on the lower quartiles.
Or, if top decile, which might actually be a separate distribution, is reduced by tax, the lower quartiles may drop. The connectivity implicit when one discusses inequality does not really exist.
So, to use the aggregate tells you nothing and provides no prescription.

BI: You go on to say he erred in trying to compare nations' outcomes. What did you mean?

MR: Nation states, as far as macro economics, are really a fiction. The real aggregations are among hegemonic powers which set economic policy for their group or are a constantly morphing alliances of regions that transcend national borders.
And currently there is only one true hegemon which is the USA, but regional hegemons have defining capability if the USA has benign indifference in a certain region. For example Brazil has much clout in South America now. This is always a fact of life now and the usefulness of examining many nations hasn't really been useful since Metternich.
In fact many of the wars in the last 150 years have been caused by one power thinking that there was a balance of power and one could, by strategy, dominate. Germany and Japan made that mistake in the 1940s and China may be doing the same now. What this means is there is little relevancy or usefulness in comparing Italy in the 20th century to the USA, for example.
Some economic histories are useful as they produce a laboratory of unique events, like Weimar inflation or Sweden's solvency crisis of 1990s, but then only in terms or organizing ex ante thesis. The empirical record is useless.

BI: Piketty described a "fantasy world." What are you referring to?

MR: The fantasy world is the same as Rogoff and Reinhart offer: that there is a scientific theorem that can be developed from this analysis of many national accounts. But that assumes there is equivalency between nations and consistency of the subsector input that makes the national accounts. The above two points do a good job in briefly explaining why that is a fantasy.

BI: You said you preferred Henry George's analysis of income distributions. Who was he and what did he say?

MR: Henry George was akin to Keynes and also Locke, that sound economic policy cannot leverage "luck" in being given rare resources from an accident of birth or through lucky stratagems. George called this resource "land," later Keynes would call this capital and land. But the common denominator is one class of folks are "rentiers" who only seek a low risk return on their assets — usually inherited. That income is "rent." Again in George's time that was, for the most part, real rent on land leases.
George proposed that all funding of the public purse would be a tax on rent. Keynes went further and proposed that not only would rentiers be disproportionately taxed, but their " euthanasia" should be sought. George would propose that inequality between rentiers' capital accumulation and income of consumers and entrepreneurs is the only inequality to seek reducing or eliminating. Keynes agrees, so do I.
To not differentiate this income type, speaking to the first point above, invites disaster. Why would you tax a Bill Gates midstride? It would be very destructive. Yet Bill Gates' income explains much of the income inequality. But would taxing late-stage Buffett be good? Perhaps. Certainly to tax third-generation rentiers and forcing the money back into the hands of future Bill Gateses, perhaps by funding universal education to promote future Bill Gateses, is good.

BI: Is there anything Piketty got right?

MR: No, there is very little Piketty got right. And his work lacks integrity with solipsism and "pop" so that I suspect he is a careerist. All the above he would know well.

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About Me

Many years of experience in being a market maker, a trader, a salesguy or portfolio manager in almost all asset classes known. Have had a high teens average career return and yet can say that I have lost more money in more asset classes than anyone I know.
My biggest curse is that not even wishing to become involved: "I see dead people.", as the kid said in the movie. I can smell a trade in the drawer or financial fraud or PL blowup miles away. Should have been with the FBI if wanted to max social utility.
Autodidact in all things math, formal education in history.